by Debra Fiakas CFA
In the coming years power generators will be under pressure to meet new standards for lower carbon emissions embedded in the EPA’s Clean Power Plan. Each state has to meet a set of standards set by the EPA based that state’s particular circumstances in electrical generation. The carbon pollution limits begin in 2022 and ramp to full effect by 2030.
Power generators could meet standards by reducing harmful emissions from existing fossil fuel-fire plants. Unfortunately, that may prove too costly at some of the older plants. It is logical that power generators will look increasingly to renewable energy sources, creating a welcome boost in demand for firms that serve that sector with design, engineering and other consulting services.
Tetra Tech, Inc. (TTEK: Nasdaq) is a leading provider of engineering, construction and technical services to the energy and infrastructure markets. They also provide a diverse menu of product management and consulting services for resource management, water conservation and environmental improvement. The company has completed projects around the world and appears to have a solid reputation in both developed and emerging markets.
Tetra Tech has a successful track record in all types of power generation, including conventional fuel-powered plants. In my view, its stature is higher in the wind energy market. Indeed, at least one engineering publication ranked Tetra Tech as number two in the world in wind energy project engineering. The company claims to have worked with twenty of the top twenty-five wind power developers and a majority of the wind equipment manufacturers.
One of the reasons the company may have gained such a large presence in wind is its environmental expertise. Tetra Tech personnel working on wind projects know their birds and bats, giving them the extra knowhow to help their clients resolve environmental objections.
Tetra Tech showed other valuable qualities in its work as the prime contractor for the Fire Island Wind Project near Anchorage, Alaska. The 17.6 megawatt project eliminates the need for burning about 500 million cubic feet of natural gas. The location is an uninhabited island where the turbines are the least disruptive. However, the location also posed significant logistical and safety challenges during the construction phase. The company completed construction of the eleven 1.6 megawatt wind towers, turbines and connecting facilities ahead of schedule and with no incidents or injuries.
Interestingly, Tetra Tech itself sees other opportunities as better growth markets. The company is targeting the coal ash problem created by fossil fuel-powered plants. Likewise, management has identified the conventional oil and gas industry as low risk because the oil majors typically have strong spending budgets for environmental management. Indeed, Tetra Tech really shines when it comes to cleaning up the ‘nasty by-products’ of the energy industry as we know it today.
Tetra Tech reported $1.75 billion in revenue in the twelve months ending June 2015, providing $93.4 million in net income or $1.49 per share. The company is a consistent generator of cash, delivering $147.2 million in operating cash flow in that same twelve month period. As a solidly profitable company, it is surprising that its stock is trading at 13.6 times the consensus estimate for the fiscal year ending September 2016. A forward dividend yield of 1.3% and a $200 million stock buyback program make the stock even more interesting.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has issued a Buy rating on TTEK.